Printing Money Laid Bare: The 'Goldbugs' Reply

Back in the final, dying days of 2012, Paul Tustain here at BullionVault offered
a little fable to explain why money exists, how it is created by banks today,
and why things could get very ugly tomorrow.

You can read short sections of Money Printing for Beginners (and Experts) across
the internet. Active customers, and anyone test-driving BullionVault for
themselves this month, has been able to read Paul's whole 20-page report too.
He starts by introducing Godfrey and Brad - who are good and bad, respectively,
with money. Because one is productive, while the other isn't.

Which means that, over time, Brad starts to owe Godfrey more and more tasks
and jobs, which Paul says we can think of as "unreturned favors" (otherwise
known as an "uf"). Or rather, Brad's bank starts to owe Godfrey's bank more
and more money. Which is where humanity's social credit now gets transferred.
And where it builds up - here in the positive, there in the negative - when
those unreturned favors stay unreturned.

"My wife and I have modest BullionVault silver and gold holdings," says one
reader, sharing his thoughts and comments as Paul invited all readers to do, "in
the sure belief that our young grandchildren will benefit one day. As things
stand in Ireland, the present generation of little-ones will also be required
to pay off the gambling debts of our 'Brad' banks thanks to gutless politicians
and greedy developers."

"May I suggest changing Ufs for IOUs?" says another reader. Which would be
exactly right, if the debt weren't depersonalised, and the favor "unreturned" to
the world in general, instead of a specific individual, through the medium
of money.

"[But] the definition of Uf is vague," says a third. "Is it a perception or
a measurable? What should it be?

"For example, if perception, then Godfrey and Brad would see Uf as two different
values based on their own perspective of the unreturned favour Uf(g) and Uf(b)
which are not necessarily equal to each other.

"Whereas if measurable, then Uf(g) = Uf(b). There is now, potentially, an
inequality in the system, an Error."

Perhaps it helps to be, as with this reader, an MSci and former credit trader.
But now that "Uf(g) = Uf(b) + E...one can then argue that large-scale randomness
would eliminate E. However, behaviour patterns may give rise to systematic
error thus creating a large imbalance. So Uf is not a constant or balanced."

Which might suggest why our modern monetary system is so very unstable - a
concern shared by many of the 70-odd other detailed and thoughtful replies
which Paul's article received. Most focused on the unreliable nature of currency
as a long run store of value. More importantly, this little sample of what
journalists might choose to call "goldbugs" is anxious about what it means
for them.

"When oil, the stock market and gold all go up, it is so easy to think one
is richer," says one BullionVault user based in Indiana. "Actually, one is
a little poorer because the little guys never do as well as the big players
in the markets. What really happened is that the Dollar, Pound and Euro actually
declined in value. Politicians in all countries use this rubber meter stick
against us."

"In my case," says another Bullion Vault user, "I am already receiving my
pension both from an occupational scheme and now from UK national insurance.
I am resigned to see both these pensions evaporate over the coming years."

At the national rather than personal level - and so tied into Paul Tustain's
closer point that cross-border debts are unlikely to paid in full - "We have
the 'Oil Fund' here in Norway," another user writes, "with assets of $600bn
(33% in USD, 33% in Euro and the rest in other paper monies) and we think our
future is secured by these savings, mostly in sovereign debt.

"It's not even a discussion about the exposure we have to other central bankers.
We sell oil and receive some potentially worthless fiat monies in return. And
no one asks any questions."

Closer to home, " Is there any way I can get my pension pot out of Sterling?" asked
more than one reader of Paul's warning. To which the answer is no, not once
your annuity has been bought, as one customer - "expat, with a problem" - noted.

Perhaps "I should content myself with eventually paying for a cup of tea with
my annual pension," he says. But many more - while not yet being resigned -
can't see a way clear either.

"I fear a lifetime of savings to be lost. I am unsure how to play the end
game..."

"My problem is what to due to protect my money (not alot) perhaps by going
for another currency - but which? I am not an expert on antiques or art so
that's out..."

"Inflation will surely rise up at some point...but will physical land and
property be better that equity in well run companies? Will it all become a
matter of guessing the right currency which stores some value (gold included)
and buying anything in that currency?"

Now, faced with such uncertainty, many of Paul's readers felt his report itself
might provide a solution. "Selected Ministers of Finance, plus certain senior
bankers and hedge fund managers, should be forced to read the entire article
aloud every day for a month," as one of them put it. But still, chances are
that the UK chancellor, for example, wouldn't understand "a word of this.

"If I'm wrong and he does, then he is no more nor less than a vulgar crook" -
an anger shared by most readers.

"What I do know," as one explained, "is that the printing of money by central
banks is theft on a grand scale, whatever else other people call it.

"It simply transfers wealth from the poor taxpayer to the oligarchs in the
banking industry, including those in central banks who draw obscene salaries,
bonuses and allowances and are showered with honours and awards by politicians
who hope (with plenty justification) to have favours returned. This is why
I have an account with BullionVault."

Of course, "The taste of self-interest can't be totally washed down with your
logical reasoning," as another (ahem) BullionVault customer noted. And Paul's
article brought in plenty of correctives and challenges too. A handful were
plain wrong, and a couple misread everything. But down in the detail, "The
swelling of Central Bank balance sheets doesn't create quite the 'real' appetite
for collateral you mention," wrote one reader. Because "the collateral itself
is generally re-hypothecable, which means that the borrower can himself use
the same asset to collateralise his negative Ufs in your terminology.

"Net result? Three x 750bn of net assets can probably be met by only 750bn
to 1 trillion of new collateral. This doesn't negate your argument, just makes
it possible to perpetuate for a longer time before anybody realises how worthless
[the collateral] has become."

Put another way, "How long is it going to take before some of the [financial]
chickens come home to roost?" as our final respondent puts it. "After years
of a steady rise, gold has spent the last year fluctuating (wildly) about $1650
per ounce, offering a poorer return than even the pathetic savings rates available
from the banks."

Sovereign debt and currency collapses tend to happen very very slowly however...and
then all of a sudden at once. Or so says history. Physical gold and silver
by themselves are unlikely to prove your one-stop solution, and not everyone
will choose the right bridge from here to the other side of the mess. Fewer
still can fit on. But that won't make turning back or jumping off any wiser.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.